Monday Musings

Monday Musings

With first quarter results now in the books attention turns to how companies will handle the slow reopening of the economy. While many experts remain cautious worried that the progress that has been made can reverse itself with people going back to work the fact is many states are proceeding with reopening plans. As we have noted major changes are being made to protect the health and safety of workers as they return but no one knows for sure if these changes will prevent the virus from remerging.

About the only thing everyone seems to agree on is that economic conditions will likely get worse, possibly much worse before they get better. Unemployment now at almost 15%, another number experts expect to get worse, will hamper any recovery given the importance of consumer spending. The simple fact is we are a consumer driven economy. With unemployment at record levels and getting worse it’s difficult to imagine any sort of quick recovery.

These dismal unemployment numbers are one reason we continue to believe that Livongo was overly aggressive when they raised full year revenue guidance. The Livongo numbers are predicated on the assumption that employees will continue to sign up for their program. That employers will stop shedding workers and bring back workers who have been laid off. The guidance is further predicated on the assumption that employers will not make additional cuts going forward.

With the stock on fire everyone seems to be ignoring the possibility that employers will make temporary layoffs permanent, that additional work force reductions are possible and that additional cuts in spending will be made to conserve capital. Instead Livongo bulls seem to be placing their faith in the fact that telemedicine and remote patient monitoring are here to stay. That at long last digital health will achieve the savings and outcomes promised by many in digital health.

While we agree that telemedicine and remote patient monitoring will get a boost we are not as sure employers will continue to pay for these programs in the near term. The simple fact is you can have the most way cool whiz bang program in the world but without any members to use the platform you don’t have revenues. The entire Livongo business model is built on the assumption that they will continually sign up new members and keep the members that have already signed up. That these new and existing members will continue to generate the reoccurring monthly fees paid by the employer of the employer’s health plan.

Think about what happens if the temporary layoffs are made permanent, additional employees are terminated and companies in an effort to conserve capital institute additional spending cuts. What happens then? The entire Livongo business model falls apart that’s what. With fewer new members and higher attrition rates monthly fees will start decreasing not increasing. As we have said before we could care less how many clients/employers Livongo signs up, what matters is how many EMPLOYEES become and remain members.

Yes, we know that the more employers Livongo signs up the greater the pool of possible members. However Livongo does not have the luxury of signing up only the few employers who are not impacted by the crisis. This crisis is touching every aspect of our economy. Just as there is no human immunity from the virus there is no area of the economy that is immune from its impact.

Consider this from today’s Wall Street Journal;

“Factory furloughs across the U.S. are becoming permanent closings, a sign of the heavy damage the coronavirus pandemic and shutdowns are exerting on the industrial economy.”

The fact is and we hate to bring him back, but we must you can’t swing a dead cat without hitting one company or another that isn’t hurt by the crisis. Factories aren’t the only places temporary closing are becoming permanent, think of the millions of small businesses that will never reopen. Just yesterday Nordstrom announced the closing of 16 stores, J Crew and Neiman Marcus have declared bankruptcy and Macy’s is on the brink.

Livongo is not like Insulet another company that has a reoccurring revenue model. Unlike Insulet they do not have a large established installed user base. Unlike Insulet their program is a nice thing to have but it is not keeping the patient alive as the OmniPod does. While Insulet wants new patients adds they can survive with fewer new patient adds. New member sign-ups are critical to Livongo’s survival. Take away new member sign ups and increase attrition, something Livongo never discusses, and that monthly reoccurring revenue stream begins to dry up.

Let’s be very clear here this has nothing to do with the Livongo platform. This has everything to do with their business model and current economic conditions.

Livongo continues to play their dangerous of game, betting that a greater fool will come along and buy them before having to deliver on the promises they have made. They continue to play up this tenuous at best connection to COVID. They are riding the telemedicine, remote patient monitoring digital health wave. They continue to use fuzzy math when calculating revenues again hoping that a greater fool comes along before they have to show REAL money coming in.

Yet the one thing they cannot do even with their panache for chutzpah is change what is happening out in the real world. They cannot change the unemployment numbers. They cannot change companies large and small going under. They cannot change economic conditions that likely will get worse before they get better which will only push companies that do survive into making even more spending cuts.

Do we want this NO, but it is what’s happening in the real world and it would be foolish to ignore it. All the happy talk int the world, all the wishful thinking won’t change the ugly reality. As Momma Kliff used to say people have a choice they can see things for the way they really are and deal with it or they continue to ignore reality and have reality forced upon them.